The saying goes that hindsight is a wonderful thing. In the matter of Fixed Rates in 2022, this rings true. I’m sorry to say, the ship for fixing your home loan to “beat the market” has sailed. 

This is an unfortunate reality that everyone is going to have to deal with. The media are far too late in encouraging people to fix their home loans. So doing so now may actually go against you. 

I am going to explain why this is, and how you can best protect yourself from the now inevitable, rate hikes.

How do Fixed Mortgage Rates Work?

Firstly, I want to point out that financial markets are complicated so that people get paid to show other people how to navigate them. It has been this way since the beginning of time, and I don’t see this changing. So I am going to try and break down why you should carefully consider your move to fixing before taking the leap that cannot be undone. 

“Fixed rates” are priced off a completely different market than “variable rates”. The media don’t acknowledge this when they talk about how you may be affected. They make people think they are getting ripped off to trigger an emotion, so you come back for their next piece of guidance.

Fixed rates started moving in October 2021, they are priced off the bond yield markets which skyrocketed as shown in the table below. This was off the back of international markets showing weakness and inflation figures shot through the roof in the USA and other western countries followed.  

Again, this is all the complicated jargon that they make difficult to understand. No one notices anything until after the fact when they realise “holy shit, my interest rates could be going up”. 

Fixed rates have front run variable rates on the way up, and on the way down. 

Why it’s too late to fix your home loan interest rate

To make this simple and easy to understand, let’s look at a live example.  

Macquarie Bank Variable rate is dynamite. As at 30/04/2022 it is sitting at 2.24% for a normal owner-occupied home loan at 80%. 

Now let’s look at what the current advertised fixed rates are:

1 Year Fixed: 3.65% 

2 Year Fixed: 4.49%

3 Year Fixed: 4.85%

Say you fix for 1 year now, you are overpaying by 1.41% from day 1. This means that you are going into the red before you can get back into the green. To get back into the green the variable rates will have to skyrocket past the 3.65% to make up the ground you lost in the early stages of the 1-year period where you were paying more than the variable rate payer. 

Then for a 2-year fixed rate, it goes up a whopping 2.25% above what you would pay as a variable rate customer, meaning rates would have to blast past a 4.49% in that two-year period for you to recover your ground lost in the early stages of that fixed rate term. 

If either of these situations above happened, I would have some grave concerns for the Australian property market. 

We have no way of knowing how the next 2 years will pan out. The banks probably have a greater idea than most of us but they still don’t know. Even if we had ten rate rises of 0.25% in the next 2 years, you would still be better off sticking with a variable rate loan. 

How to prepare for the interest rate increases ahead

So you might be asking, ‘what do I do now if it’s too late to fix?’. The number of people that don’t know their interest rate astounds me. It’s hard to keep track of as they move around a lot even by small amounts without us noticing. If you were to review your interest rate at least annually, you would be doing more than most. Your variable rate has likely got a lot of room to move and your bank will not let you know voluntarily. 

Here are three things you can do to ensure you are in the best possible position for the next couple of years of turmoil. 

1. Review and Renegotiate

Review your current interest rate with your lender, does it match Macquarie’s rate above for example? If not, then you can get on the phone to them and demand a better deal. Even tell them that another bank has offered a sharper rate. 

2. Refinance

If your bank doesn’t get you close to the above, then you should be speaking to your broker and looking elsewhere. No matter how long you have been with your bank, you are a number to them. If they cannot help you with your finances, then why are you helping them with theirs. 

3. Sign up to RateTracker and let us handle both

If you’re feeling overwhelmed and under-prepared to review or refinance your mortgage, signing up to RateTracker can have monitoring your mortgage handled in under 2 minutes. We’ll connect to your home loan and review your interest rate every 30 days. If your home loan interest rate exceeds the acceptable threshold determined by the team then it will trigger a “RateBreach”. When a RateBreach occurs, you will receive a text to let you know, before the team at RateTracker will get on the phone to your bank to re-negotiate your rate on your behalf. 

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There are things you can do to protect yourself and make sure you are in the best possible position to weather interest rate rises. 

Please think twice about fixing now, if you want to be warned next time this occurs then follow us, subscribe to our podcast, and connect RateTracker and get will be notified of these matters before it gets to the point where you are exposed to additional financial risk. 

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